Up by 81% over the past 12 months and 34% year to date, Deere & Company (DE -0.19%) stock has escaped the doldrums it has long been mired in. The company once again has growing revenue, earnings, and stock value. The fiscal third-quarter report it recently delivered shows circumstances are favorable for it right now, and it's taking positive actions to profit from the opportunity -- though a few potential stumbling blocks remain.

The market environment

The economic results of the COVID-19 pandemic set several trends in motion beneficial to Deere and other equipment manufacturers. Rising commodity prices are infusing more money into the agricultural sector. That is enabling farmers and agribusinesses to buy new equipment to meet rising demand or replace older, worn-out gear.

A Goldman Sachs rating upgrade for Georgia-based agricultural machinery maker Agco (AGCO 0.37%) included a research note saying its decision was "driven by our positive outlook on a multi-year recovery in long-cycle ag [agricultural] equipment demand." The note also said "declines in used equipment inventories over the past seven years (60+% decline) and rising used equipment values (+26% yoy) signal a strong multi-year need for" new equipment.

An excavator and other heavy equipment under a cirrus sky at a construction site.

Image source: Getty Images.

Deere's Q3 2021 earnings call presentation details projected gains in a range of sectors. Sales in various categories in small and large agricultural equipment, forestry, and construction are forecast to grow by 10% to 25% in 2021. The regions included are the U.S., Canada, Europe, South America, and Asia, showing the surge in demand is worldwide.

During its Aug. 20 conference call, Deere's manager of investor communications, Brent Norwood, noted the "combination of higher commodity prices, strong production, and a favorable currency environment, have boosted the profitability of farmers, driving orders through the remainder of the year and into the first quarter of fiscal year 2022." He went on to say that "despite limited government-sponsored financing programs, private financing is more widely available this year, supporting continued strength in equipment demand."

Deere's response

Deere's execution relative to its market opportunities through this fiscal year and into the next one looks positive for its growth and performance. Its revenue rose 29% in fiscal Q3 to $11.5 billion, and increased 27% for the fiscal year to date, while net income rose by 106% year over year for the quarter to $1.67 billion, delivering earnings per share of $5.32 compared to $2.57 for the prior-year period.

The vehicle and equipment manufacturer is clearly operating efficiently, as shown by its margins. Raw material prices are up significantly this year, with domestic hot-rolled coil steel, for example, up to $1,936 per ton for September contracts on the New York Mercantile Exchange. That type of steel cost between $500 and $800 per ton before the first COVID-19 lockdowns. Supply chain problems and labor issues are driving additional disruptions.

Nevertheless, in its fiscal Q3, Deere's operating margins rose by around 2% to 3% for the production & precision agriculture and small ag & turf segments. In its construction segment -- the best-performing unit in terms of margin gains for the period -- margins rose by 6%. 

For the full fiscal year, Deere expects a 20% to 21% operating margin from its production & precision agriculture segment, up from fiscal 2020's 15.2%. The margin forecast for the small ag & turf segment is in the 17% to 18% range versus 2020's 10.7%, while construction & forestry is expected to finish with a 13% to 14% operating margin, more than double the 6.6% it produced in the prior year. Deere expects its various segments' full-year net sales to be up in the 25% to 30% range.

Deere increased its prices while maintaining excellent, growing sales, which offset the impact of rising raw materials costs. Its price realization for the year is expected to be in the 5% to 8% range, varying across its segments. During the fiscal Q3 earnings call, Director of Investor Relations Josh Jepsen said this price realization has been "very favorable" for the company. The benefits come from price, volume, and boosted sales of high-margin items such as excavators used in construction.

Deere also announced a 17% quarterly dividend hike on Aug. 25 from $0.90 to $1.05, passing some of the rewards of its successful strategy and fortunate positioning along to its shareholders.

Deere's outlook

Profits for farmers, much like corn, are growing "high as an elephant's eye" in the agricultural sector right now. The forestry, construction, and turf equipment categories are booming, too.

In this environment, Deere is likely lined up for further growth. Its margins, successful price increases, and the sheer level of worldwide demand for vehicles and equipment make it hard to be anything but bullish about the company. As far as industrial stocks go, Deere appears to be a winner.